Answer (B) is correct . The cost of new debt equals the annual interest divided by the net issue proceeds. The annual interest is $1.2?million ($15,000,000 × .08 coupon rate). The proceeds amount to $14,850,000 [($15,000,000 × 1.01) market price – ($15,000,000 × .02) flotation costs]. Thus, the company is paying $1.2 million annually for the use of $14,850,000, a cost of 8.08% ($1,200,000 ÷ $14,850,000).
Answer (A) is incorrect because The contract rate is 8% annually.
Answer (C) is incorrect because This percentage is the sum of the coupon rate and the flotation rate.
Answer (D) is incorrect because This percentage ignores the 2% flotation costs.
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The before-tax cost of DQZ’s planned debt financing, net of flotation costs, in the first year is
